Monday, December 13, 2010

Borders reported a dismal 3rd Quarter as many analysts expected. Some have speculated that the company is now flirting with bankruptcy and possibly liquidation. Prior to the earnings report, there was again speculation about a B&N Borders combination but this will never happen and with this Borders report it is even harder to understand why B&N shareholders (to an extent that they exert independence) would ever believe a combination would be in the interest of B&N.

Borders Group, Inc. (NYSE: BGP) today reported results for its third quarter ended October 30, 2010 and the undertaking of important steps in its brand transformation process. Results include:

Third quarter sales were $470.9 million, a decrease of 17.6% from the same period a year ago. Comparable store sales declined by 12.6%.

The Digital and Kids Toys and Games categories outperformed all other categories, with Digital comparable store sales nearly doubling, and Kids Toys and Games comparable store sales increasing 6.6% for the quarter.

The company incurred a loss from continuing operations in the third quarter of $74.4 million or $1.03 per share. For the same period a year ago, the company had a loss of $37.7 million or $0.63 per share.

The company reduced debt net of cash by 12.7% compared to the third quarter of last year, and inventory was reduced by $233.7 million.

Borders.com sales decreased 8.6% over the prior year to $12.5 million; however, fiscal year-to-date through the end of the third quarter, Borders.com sales increased 24.0% over the prior year, to $43.3 million. Notably, the company made significant improvements to its e-commerce platform during the quarter and added a number of services in preparation for the fourth quarter and beyond.

More than 580,000 customers have signed up for the company's Borders Rewards Plus program, generating more than $11 million in membership revenue since launching Sept. 1, 2010.

"Our third quarter results reflect the business challenges facing Borders and the industry at large," said Mike Edwards, CEO, Borders, Inc. "While we are disappointed with third quarter results, my management team and I continue to vigorously address these challenges and our commitment to winning at retail is stronger than ever.

"We're pleased that our publishers and strategic partners have continued to support our business and brand initiatives. We have a comprehensive, executable plan in place that supports our goal of transforming the iconic Borders brand into a profitable economic model over time. I am happy to say that the elements of the plan we've executed thus far have been successful. Our Borders Rewards Plus program has generated more than $11 million in membership revenue since launching just one hundred days ago. Notably, Borders Rewards Plus members shop more frequently and have a higher than average ticket driven by significantly higher units per transaction.

Total sales for the second quarter were $1.9 billion, including sales of Barnes & Noble College Booksellers (“College”) of $798 million. Excluding College, total sales increased 1% over the prior year period. Comparable sales at Barnes & Noble.com increased 59% driven by increases in core products and sales of digital devices and digital content. Barnes & Noble comparable store sales decreased by 3.3% and College’s comparable store sales decreased by 1.5%.

The expansion of the Toys & Games department at Barnes & Noble stores produced a 42% sales increase for the department during the second quarter. In the third quarter, the company began testing additional concepts, including an expanded children’s offering and digital and electronics accessories, to drive further sales increases in 2011.

For the second quarter, the company reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $46 million. The consolidated second quarter net loss was $12.6 million, or $0.22 per share, in-line with previously issued guidance of earnings of $0.05 per share to a loss of $0.25 per share.

As previously announced, the company continued to invest heavily in digital initiatives including: software and cloud services development costs; expenses relating to NOOKcolor; the addition of hundreds of thousands of titles to its digital catalog including a subscription management platform for digital newspapers and magazines; creating interactive proprietary content for children’s books; developing applications to serve multiple reading and smartphone devices – including iPad®, iPhone®, Android™ and BlackBerry®; and the rollout of NOOK Boutiques in Barnes & Noble retail stores.

The additional investments are expected to continue and peak during the second half of the year, and then increase moderately in the years ahead. Payoff for these expenses is estimated to begin to appear in the third quarter, when NOOKcolor is expected to be one of the world’s most sought after eReaders, and in the third and fourth quarters, when NOOKcolor owners will begin downloading digital content, including books and magazines....Barnes & Noble.com’s comparable sales are expected to increase by approximately 75% for both the third quarter and the full year. The company believes these sales increases will be driven primarily by growing sales in core products and the exploding digital content business. By fiscal year end, the company expects that digital content sales will achieve a $400 million full-year run-rate.

Barnes & Noble comparable store sales are expected to increase between 5% and 7% for the third quarter, and to be in a range of flat to 3% for the full year. Increases in sales will be largely driven by sales of NOOK™ devices and accessories, and by increases in children’s products and other non-book merchandise.

During the three-day post-Thanksgiving weekend, the company experienced a strong comparable store sales increase of 17.2% at Barnes & Noble stores and a comparable sales increase of 105.7% online.

College’s comparable store sales are expected to be in a range of flat to a decrease of 2% for the third quarter and the full year. The company expects to achieve EBITDA of approximately $160 to $190 million and $170 million to $205 million, for the third quarter and the full year, respectively. Third quarter earnings per share are expected to be in a range of $0.90 to $1.20. Full-year fiscal 2011 losses per share are expected to be in a range of $0.75 to $1.15.

Booksamillion reported financial results for the third quarter and 39-week period ended October 30, 2010 and net sales for the13-week period ended October 30, 2010, decreased 5.5% to $104.8 million, from net sales of $110.9 million in the year-earlier period (PR).

Comparable store sales for the 2011 third quarter decreased 5.8% when compared with the 13-week period for the prior year. Net loss for the 2011 third quarter increased to $1.7 million, or $0.11 per diluted share, compared with a net loss of $1.6 million, or $0.10 per diluted share, in the year-earlier period.

For the 39-week period ended October 30, 2010, net sales decreased 2.8% to $341.8 million, from net sales of $351.5 million in the year-earlier period. Comparable store sales decreased 4.2% when compared with the same period in the prior year. For the 39-week period ended October 30, 2010, the Company reported net income of $2.2 million, or $0.14 per diluted share, compared with net income of $1.9 million, or $0.12 per diluted share, for the year-earlier period. Commenting on the results, Clyde B. Anderson, Chairman, President and Chief Executive Officer, said, "Comparable store sales for the third quarter were disappointing as we faced a tough comparison to last year's bestseller lineup and a cost conscious consumer buying fewer hardcover books. We did see continued positive trends in bargain books and gifts. As we look forward to the fourth quarter we are excited about our new toy, gift and electronics departments, our entry into the video game business, our expanded offering of DVDs and the introduction of the NOOK range of e-readers including NOOKcolor."

In mid October WH Smiths (UK) reported their full year ending August 2010 (PR):

Group profit before tax and exceptional items up 9% to £89m (2009: £82m)• Record profit performance from Travel with operating profit up 10% to £53m1 (2009: £48m)• High Street operating profit up 4% to £51m1 (2009: £49m)• Total Group profit before tax2 of £89m (2009: £81m)• Underlying earnings per share3 up 11% to 45.7p (2009: 41.3p). Earnings per share (includingexceptional items) 4 up 13% to 45.7p (2009: 40.6p)• Strong balance sheet and cash generation• Strong free cash flow5 of £82m (2009: £89m)• Net funds of £56m versus net funds of £45m as at 31 August 2009

In Books, LFL sales were down 3% but gross margin was up year on year. The books market was soft, however performance varied by sub-category, with fiction up year on year, kids flat and non fiction down with the reduction in sales of celebrity biographies being a key driver of market decline over the period. We again saw further good share performance versus the general retail market as we continue to implement our strategy to build our authority as a popular book specialist. The strength of our position was demonstrated by WHSmith receiving the Children’s Bookseller of the Year award and securing the rights to launch the new Richard & Judy Book Club, exclusively to WHSmith. We are also building a strong position in the developing eBooks market. In Travel, we have developed our books offer further by extending book charts and launching exclusive early editions of certain key titles in airports.

In Canada, Indigo the country's only national book retailer reported a 3.8% growth in revenue for its second quarter ending October 2, 2010. (PR)

Revenue for the quarter was $214.8 million, up $7.8 million from last year. On a comparable store basis, Indigo and Chapters superstores posted a 0.7% decline in revenue, while small format stores were down 4.8%.

Commenting on the results, CEO Heather Reisman said, “We are pleased with our top line revenue growth, particularly in our rapidly growing digital business. Consumers have responded very favourably to our Kobo eReader, launched in the middle of our first quarter, and are showing even greater response to the new Wi-Fi model launched this past month.”

Ms. Reisman noted, “Our core retail book business experienced a challenging quarter against a very strong line up of titles in the same period last year. Our gift and toy businesses continued to show significant growth and reinforced our decision to expand these categories meaningfully in a majority of stores moving forward.”Net loss for the quarter was $1.7 million compared to a net profit of $2.2 million last year. Ms. Reisman noted, “The increased loss was expected as we continue to invest in the growth and development of our digital initiatives and the re-development of our stores to accommodate growth in our gift and toy businesses”.

The Board of Directors today also approved a quarterly dividend of 11 cents per common share to be paid on December 14th, 2010, to all shareholders of record as of November 30th, 2010.

During the quarter, Kobo, the global eReading service of which Indigo owns 59%, announced plans for its application to be preloaded on both the Samsung Galaxy and the BlackBerry® PlayBook™ tablets. They also announced their 3rd Quarter launch of the new Kobo Wireless eReader which adds Wi-Fi connectivity, upgraded hardware with faster performance, longer battery life, a sharper eInk screen and easy access to the Kobo store hosting more than 2.2 million books. Shortly after the close of the quarter, Kobo announced the addition of dozens of newspaper and magazines to the assortment including The Globe and Mail, The New York Times, The Wall Street Journal, and Harvard Business Review. Kobo will continue to expand its newspaper and magazine offering. Kobo also announced that it will now be selling in 2,500 Walmart locations throughout the United States, expanding on its current availability at Canadian Walmart stores.

Given the continued growth of Kobo's business, Kobo is seeking to raise additional financing by way of a private placement to cover working capital needs. The amount to be raised, the financial terms, and the timing of the financing will be determined by Kobo in consultation with its financial advisors.

Down Under, RedGroup's financial woes were evident in their annual report submitted in August:

Earnings before interest, tax and depreciation and amortization (EBITDA) for the year was NZ$27,045k. The consolidated entity’s loss after income tax for the year was $42,970k (2009:$14,743k). The result includes a one off, stock impairment charge of $30,317 attributable to the integration of the Borders acquisition. Revenue decreased 10% from prior year as the retail industry generally became more challenging post the global financial crisis. Cost of doing business (excluding interest) decreased 12% realizing the full year benefit of prior year integration initiatives. The business continues to take advantage of the internet and technology opportunity making an equity investment in Kobo Inc. and allowing customers to purchase and download eContent directly from REDgroup retail websites.

It should also be noted that REDGroup's cash position was marginally improved over the year.

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Michael Cairns

I enjoy discussing the publishing industry and in particular the changes that impact the business. On PND, I don't write about everything, just the things that interest me.

My career spans a wide range of publishing and information products, services and B2B categories and my operating and consulting experience has largely been with brand-name companies such as PriceWaterhouseCoopers, Macmillan, Inc., Berlitz International, AARP, R.R. Bowker and Wolters Kluwer.

I have served as a board member of the Association of American Publishers (AAP), the Book Industry Study Group (BISG) and in addition to my responsibilities at R.R. Bowker, l also served as Chairman of the International ISBN Executive Committee.